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Constitution of Boards of Public Sector Banks in India

Santanu Kumar Dash*, FCS, Company Secretary, Corporation Bank, Mangalore.

e-mail : santanu_dash@yahoo.com

Public Sector Banks play a vital role in shaping the financial service sector of the country by supplementing the financial needs of the industrial sector particularly SSI and MSMEs. For this banks need to have a dynamic and competent Boards of Directors. Key issues relating to appointment of bank directors have been discussed here.

CONCEPT
Any organization which is permanent in nature requires people with different competencies to man its effective functioning. While the day to day affairs are being streamlined by the whole time people known as the Whole Time Directors, other directors are involved in the policy decisions and other important matters which affect the destiny of the firm. This is true in the case of government owned Public Sector Banks (PSBs), banks nationalised through an Acquisition Act by Gazette notification and acquired by the Government of India from the erstwhile privately operated owners. These public sector units reflect the imbibed culture and policies of the Government of India.

The listed Public Sector Bank Boards are also required to comply with requirements relating to composition of the Board as per Clause 49 of Listing Agreement.

Eligibility for Board Members

A member of the Board should have necessary qualification, experience, professional expertise read with the Compliance to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 (the Act), The Nationalized Banks (Management and Miscellaneous Provisions) Scheme, 1970/1980, The respective Bank (Shares and Meetings) Regulations after listing of PSBs Equity Shares in Stock Exchanges, the guidelines framed by Appointments Committee of the Cabinet (ACC) and used by the Department of Financial Services, Ministry of Finance, Government of India-for Non official Directors, Reserve Bank of India Act, 1934, Banking Regulation Act,1949, Fit and Proper Status Guidelines issued by Reserve Bank of India, etc..

IMPACT
For the success of any organization effective functioning of its Board of Directors is a pre-requisite. So an effective functioning of the Board of a public sector bank should be controlled and monitored professionally and ethically. With this in mind Government of India and the Reserve Bank of India have brought out certain directives in this regard.

Conflict of Interest
Conflict of interest is a situation in which a director has a personal interest sufficient to appear to influence the objective exercise of his or her duties as Director. So sufficient disclosure be made to establish that there is no conflict of interest. In PSB it has been seen that where the Life Insurance Corporation is a shareholder, say in the case of holding of LIC is more than 10% in a PSB, LIC is able to place one of its Nominee as a Shareholder Director. Since LIC is 100% holding organization of Government of India, it is indirectly understood that Central Government is sending its
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Corporate Governance compliant Board Position

Clause 49 of Listing Agreement shall apply to all the listed Public Sector Banks incorporated under Banking Laws. It does not violate the Banking Statute and guidelines or directives issued by the relevant regulatory authorities. [Vide SEBI circular dated 29th October, 2004 on the subject.] The issue of corporate governance in PSBs is important and also complex.
*Views expressed are the personal views of the author.

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shareholder of the Bank and who desires to be a Director of the Bank should possess Fit and Proper status. Further, the elected director should execute the deed of covenants and is required to furnish annual declarations as prescribed by the Reserve Bank of India in this regard.

representative through Shareholder Director route, where, in the case of election of Shareholder Director Government of India is not having voting right; alternatively the shareholder directors are elected by other than Government of India.

Fit and Proper Status

On 1st November, 2007 after the recommendation from Dr. Ganguly Group the Reserve Bank of India under the amended provisions of Section 9(3AA) and 9(3AB) the Banking Companies (Acquisition and Transfer of Undertakings) 1970/ 1980 issued circular for Public Sector Banks to implement Fit and Proper Status for elected Directors. This stipulate that every PSB should form a Nomination Committee of the Board out of Independent/non-executive Directors of the Bank of at least three members of the Board to go through due diligence process exhaustively before the election of shareholder directors and also every year for the sitting directors to evaluate their fit and proper status at the end of the March of every year.

Necessary Requirements
Since also the PSBs are listed entities the necessary requirement of Listing Agreement framed by Securities Exchange Board of India (SEBI) such as Code of Conduct for Directors, Code for prohibition of Insider Trading, Whistle Blower Policy are to be followed by the Directors on the Board of PSBs. The Deed of Secrecy and confidentiality is required to be signed by the directors of the PSB on joining the Board for maintaining confidentiality for the office of directorship including the agenda papers distributed to the directors of the PSB, including electronic mode. The Deed of Covenants is required to be executed with the Bank by the non executive directors of PSBs, which covers the role of directors and services of the PSB to the directors as per the recommendation of Dr. Ganguly Group. Dos and Donts as framed by the Department of Financial Services, Ministry of Finance, Government of India, ought to be strictly adhered to.

Required Qualification
Since majority of PSBs are listed entities, the desired qualification of the Directors of PSB should be fixed as minimum Graduate (with certain exception) with specialized knowledge and experience.

QUALIFICATIONS REQUIRED FOR BEING ELECTED AS A DIRECTOR OF THE BANK

In terms of Section 9(3A) of the Act, a candidate being a shareholder of the Bank and who desires to be a Director of the Bank shall (A) have special knowledge or practical experience in respect of one or more of the following matters namely,(i) agricultural and rural economy, (ii) banking, (iii) co-operation, (iv) economics, (v) finance, (vi) law, (vii) small scale industry, (viii) any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank of India, be useful to the Bank; (B) represent the interests of depositors; or (C) represent the interest of farmers, workers and artisans. In terms of Section 9(3AA) of the Act, a candidate being a

Present position of Shareholder Director

If the Public Shareholding of a PSB is up to 16%, there is a requirement of one Shareholder Director, if Public Shareholding is above 16% and upto 32%, there is a requirement of two Shareholder Directors and if Public Shareholding is more than 32%, there is a requirement of three Shareholder Directors. At present all PSBs are getting these Shareholder Directors through an election process where the voting power of each shareholder is restricted to 1% of total number of shares of the Bank, i.e. equity Shares. In this process the promoter of PSB, i.e Government of India is not having the voting power, i.e. the Shareholder Director to be elected from all shareholder other than Government of India shareholder. The election process is held in a General Meeting of the PSB through secret ballot. But the PSB may use the services of CDSL (the Depository), i.e. electronic voting and this voting may also be made by postal ballot, which has been followed by the Companies incorporated under the Companies Act, 1956. This will result in under participation of shareholders. But in the election process, institutional shareholders including the Foreign Institutional investors who are holding substantial portion of the total shareholdings really influence the poll
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process. Since majority of them are holding 1% cap level shareholding their involvement will not give opportunity to the minority shareholders who are having small number of shareholding. To mitigate this PSB should ensure that at least one Shareholder Director is elected from amongst the minority shareholders, say the shareholders who are holding Equity Shares upto Rs.20000 in face value.

Constitution of Boards of Public Sector Banks in India

A Balanced Board & its importance

The concept of balanced members of the board brings about more effectiveness and transparency in the functioning of the Board. A balanced board, i.e. the persons having SC/ST, Women Director, persons representing agricultural and rural economy, co-operation, small scale industry, represent the interests of depositors, represent the interest of farmers, workers and artisans, any other matter in relation to the special knowledge, and practical experience therein, which would be useful to the Bank. But it is seen that majority of the Boards of PSBs consist of Professional Accountants despite the fact that PSB is having a Chartered Accountant Category for Directors. Overcrowding of one category of professionals defeats the very purpose of the vision of a diversified Board with adequate expertise in different fields.

Quorum of the Board & Committee Meetings

As per the provisions of Sub-Clause 5 of Clause 12 of the Nationalized Banks (Miscellaneous Provisions) Scheme, 1970/ 1980, the Quorum for the Board Meeting of the PSB is one third of total Board Members as on date of the Board Meeting, subject to a minimum of three Board Member, out of which at least two Directors should be from the category of Government Nominee Director or RBI Nominee Director or Part Time Non Official Director Nominated to the Board by the Government of India [i.e. directors nominated under the provisions of Section 9(3)(h) of the Banking Companies (Acquisition of Transfer of Undertakings) Act,1970/1980]. This means in every Board Meeting at least two members present must either from the category of Government Nominee Director or RBI Nominee Director or Part Time Non Official Director Nominated by the Government of India. Quorum for the Committees of the Board either as per the guidelines or provisions made therein or if not mentioned anything in the guidelines, then the Board has to fix the quorum for the Committees of the Board. Sl. Relevant NO. Section of the Banking Companies Act 1 9(3)(a) Designation

Voting power of the Board Members

Each Board Member is having one vote and the Chairman of the Board is having a casting or second vote for taking the decision in the Board or its Committee Meetings if a tie happened.

Total strength of the Board of a PSB

As per the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 the Composition of the Board of Directors of a Nationalised Bank (PSB) may consist of following category and number of Directors from the respective areas: Nature of appointment No.

Chairman and Managing Director, Executive Director, (As on date the Government of India considering appointment of one more Executive Director to that PSB which is having Rs.1 lakh Crore business as on 31st March.) Central Govt Nominee

Appointed by the Central Government (Extrapulated from General Managers of the PSBs first as Executive Director(ED) then as Chairman & Managing Director (CMD) with certain period of Service as ED or CMD with retirement age of 60 years at present)[Whole Time Director(s)]

9(3)(b)

An official of the Central Government nominated by the Central Government. A non-whole time director. (Tenure at the at the Consideration of the Government) Possessing necessary expertise and experience in matters relating to regulation or supervision of commercial banks, to be nominated by the Central

9(3)(c)

Expert in matters relating to commercial banks. (RBI nominee Director)

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Government on the recommendation of Reserve Bank. (Tenure at the Consideration of the Government)

9(3)(e)

Director representing the workmen employee of the respective PSB

Nominated by the Central Government (for a maximum tenure of three years)

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9(3)(f) 9(3)(g)

Director representing the Officer Nominated by the Central Government (for a employee of the respective PSB maximum tenure of three years) Chartered Accountant Category Director General category To be nominated by the Central Government after consultation with RBI (for a tenure of three years at a time) To be nominated by the Central Government Total No. of Directors 6 (On election of Shareholder Directors under clause 9 (3) (i), (Maximum of 3), equal number of Directors nominated under this clause (h) shall retire if the PSB is having Public Shareholding after its IPO and listing thereof in the Stock Exchange. (for a tenure of three years at a time) Persons having Fit and Proper status, to be elected by the shareholders (No. of Shareholder Director is based on public holding of Equity Shares in the PSB) [a Shareholder Director elected for a period of 3 years and may be re elected for another period of 3 years in a PSB]

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9(3)(h)

9(3)(i)

From Shareholders of PSB other than Central Government Shareholder[voting right of Individual or single shareholder (even if by consolidating the holding of Equity Shares in a single Permanent Account Number issued by the Income Tax Authority) is restricted to 1% of total Equity Shares of the PSB] Total *(Maximum Directors)

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Section 9A of the Act

* Appointment of Additional Directors: 1. RBI has to appoint additional director(s) in the interest of banking policy or in the public interest or in the interest of that particular Bank or its Depositors. 2. The tenure of Directors shall be 3 years and extendable by further 3 years. For the purpose of reckoning any proportion of total number of Directors, any additional Director appointed under this section shall not be taken into account.

Section 18 A of the Act

Supersession of Board of the Bank: Where the Central Government, on the recommendation of the RBI, is satisfied that in public interest or for preventing the affairs of the Bank being conducted in a manner detrimental to the interest of the depositors or the Bank or for securing the proper management of any Bank, it is necessary so to do, the Central Government may, for reasons to be recorded in writing, by order. Supersede the Board of Directors of such Bank for a period not exceeding six months as may be specified in the order.

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Constitution of Boards of Public Sector Banks in India

The period of supersession of the Board may be extended from time to time, so however, that the total period shall not exceed twelve months. The Central Government may appoint in consultation with Reserve Bank of India for a period as may determine, an Administrator (not being an Officer of the Central Government or a State Government) who has experience in Law, Finance, Banking, Economics or Accountancy. Upon making the order of supersession of the Board of Directors of the Bank, The Chairman, Managing Director and other Directors shall, as from the date of supersession vacate their offices as such. The Central Government may constitute, in consultation with the Reserve Bank a committee of three or more persons who have experience in Law, Finance, Banking, Economics or Accountancy to assist the administrator in the discharge of his duties. Administrator shall call the General Meeting on or before the expiration of two months before the expiry of the period of supersession of the Board of Directors to elect new Directors and reconstitute its Board of Directors. What is needed for further improvement Due diligence of the directors of the PSB, should be done in regard to their suitability for the post by way of qualifications and technical, professional expertise. For assessing integrity and suitability, factors such as criminal records, financial position, civil actions undertaken to pursue personal debts, refusal of admission to, or expulsion from professional bodies, sanctions applied by regulators or similar bodies, and previous questionable business practices, etc. should be considered. The appointment / nomination of independent / nonexecutive directors to the Boards of PSB should be from a pool of professionals and talented people to be prepared and maintained by Reserve Bank of India like candidates for Independent Directors list hosted in the website of Department of Public Enterprises, Ministry of Heavy Industries, and Government of India. In the present context of banking becoming more complex and knowledge-based, there is an urgent need for making the Boards of banks more contemporarily professional by inducting technical and specially qualified individuals. While continuing regulation based representation of sectors like agriculture, SSI, cooperation, etc, efforts should be aimed at combining it with the need-based representation of skills such as marketing, technology & systems, risk management, strategic planning, treasury operations, credit recovery, etc., Further, the Boards of PSBs should also have representation in the areas such as finance, information technology, human resources development, economics and persons with good track record of experience in managing / advising industrial enterprises. This function of selection be also given to Nomination Committee of the Board of PSB while
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considering Fit and Proper Status for Election of Shareholder Directors. The independent / non-executive directors should raise in the meetings of the Board, critical questions relating to business strategy, including loans & recovery policy, housekeeping and internal control systems, record of exposure to various sectors / industries by way of both credit and investment, risk management systems, internal audit, accounting policy, senior management development, other important aspects of the functioning of the bank and investor relations. The good corporate governance in banks will be sustained by a knowledgeable, skillful and well informed Board of Directors with a proper blend of expertise / professionalism, independence and involvement. The directors could be made more responsible to their organization by exposing them to need-based training programmes/seminars/workshops to acquaint them with emerging developments/challenges facing the banking sector. The whole-time directors should have sufficiently long tenure to enable them to leave a mark of their leadership and business acumen on the banks performance such as at least for a period of 5 years tenure. So the Government have to consider this factors on appointment of whole time directors from amongst the General Managers of the PSB having at least 12 years remaining services, thereby the PSB should give opportunities to younger generation who performed with accuracy, transparency and of desired speed in settling the desired target or growth of the PSB in todays competitive time. Reserve Bank may bring out an updated charter indicating clear-cut, specific guidelines on the role expected and the responsibilities of the individual
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category as Director in PSB who will be useful to the Bank in matters of law, corporate governance and legal compliances. Informal discussion among Independent Directors of PSB should be made at or before Board or Committee Meetings for better understanding. Secretarial Standards issued by the Institute of Company Secretaries of India should be followed by PSB for better management of the Boards of PSB. As recommended by the Tarapore Committee, all Banks whether in Public Sector or Private Sector should be brought under an umbrella of legislation, like the Companies Act, 1956. The distribution of agenda and communication among Board members by PSB be IT system driven most likely of real time or virtual basis through a dedicated web server with search engine disability and with confidentiality, which will save time in getting agenda early by the Directors to read and understand and for discussion in the Board Meeting. Electronic made of communications should be resorted for sending agenda etc. to Board members to save time and also provide more time to the recipients. Board Meeting of PSBs could be permitted to be conducted through Video Conferencing for quick decision making.

directors including that of Whole Time Directors in the PSB. The existing level of remuneration paid (by way of sitting fees, etc.) to directors of PSB also require reconsideration. To attract qualified professional people to their boards, and expect them to discharge their duties as per the mutually agreed covenants, the level of remuneration payable to the directors should also be commensurate with the time required to be devoted to the banks work as well as to signal the appropriateness of remuneration to the quality of inputs expected from a member. The remuneration of the directors may also include the form of stock option. It would be desirable to separate the office of Chairman and Managing Director in respect of large sized public sector banks. This functional separation will bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the top management of the bank. The statutory prohibition under section 20 of the Banking Regulation Act, 1949 on lending to companies in which the director is interested, severely constricts availability of quality professional directors on to the Boards of banks subject to full disclosure and appropriate covenants. This would require a change in the existing legal framework. The information furnished to the Board should be wholesome, complete and adequate to take meaningful decisions. A distinction needs to be made between statutory items and strategic issues in order to make the material for directors manageable. Every PSB should appoint a qualified Company Secretary as the Secretary to the Board for monitoring and reporting compliance with various regulatory / accounting requirements. The Chairman of Audit Committee need not necessarily be a Chartered accountant but can be a person with knowledge on finance or banking so as to provide directions and guidance to the Audit Committee, since the Committee not only looks at accounting issues, but also the overall management of the bank. Alternate Director Concept is not available in the PSBs; it may be allowed in exceptional circumstances, for example when the Government Nominee Director is on foreign tour for a shorter duration say for 3 months or more, to enable the PSB to hold its Board Meeting with availability of Quorum. Similar to the requirement of Chartered Accountant category Director in the Board of a PSB, there should also be a Qualified professional from Company Secretary

CONCLUSION
In the light of what have discussed it is to be borne in mind that effective controlling and monitoring of PSBs needs very dynamic board members who have expertise in diversified fields consisting of Education, Cooperation, SSI, Industry, finance, Law etc. Expertise of this collaborative group will definitely contribute much to the growth of the organization. While selecting/electing directors care should be taken in seeing that over filling of any particular group should be avoided and different sections as stipulated should be evenly distributed. To equip the director with a competitive edge proper need based training should be given and exposure through seminars, interactions etc. need to be provided. Whole rime directors tenure should be at least for a period of three to five years to enable them to render fruitful service to the organization. A pool of professional and talented people should be prepared and maintained by the Reserve Bank of India for considering the appointment of Independent Directors. Sufficient time be given to each director to study the agenda in a more critical way and analyze their presentation.
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